German distressed market grows as culture changes


By Elena Moya

LONDON, Sept 22 (Reuters) - Germany's 160 billion-euro non-performing loan market will grow and remain Europe's most attractive as cash-rich hedge funds, banks and buyout firms line up to take control of the country's struggling mid-sized companies, market participants say.

Businesses such as auto-parts makers Kiekert and Schefenacker have seen their profits fall and are now negotiating debt-for-equity swaps with hedge funds, investment banks and private equity firms, which are likely to take control of firms that have been family-owned for more than a century.

Fewer loans from traditional German retail banks -- now more risk-averse as bad loans have piled up since the Berlin Wall came down -- have forced small and mid-sized company owners, such as Alfred Schefenacker, to negotiate over their stakes with foreign investors.

Numerous other German mid-sized companies have been owned by their founders ever since their creation in the years after World War Two and now face a succession problem, pushing them to open up their equity.

"In the past, you couldn't invest in Germany, now there is more information and new players," said Hermann Dambach, a director at Oaktree Gmbh, a private equity house focused on distressed investments, on the sidelines of a distressed debt conference in Frankfurt earlier this week. "Germany was always the darling that needed to be kissed to awake."

His company plans to increase its investment in Germany in the future, he said, declining to give more details.

"We like the dynamics in this country, investment opportunities are available," Dambach said.

Investors are mostly looking for mid- and small-sized companies that need a change in strategy, a refinancing or a restructuring, speakers said during the 2nd European Distressed Debt Summit.


Still, handing control to new investors after years of family ownership does not come without a dose of drama.

Schefenacker may fall into insolvency if the company and its bondholders do not reach agreement, a possibility that should not be ruled out, a person familiar with the talks said.

"Some shareholder meetings are more like active theatre," said Niklas Lerche, a director at Houlihan Lokey Howard & Zukin, a restructuring boutique, during the conference.

Rising interest rates, fears over the economy and less lending from traditional German retail banks may leave some companies with no options but sharing their equity, speakers said.

The amount lent by German banks to domestic companies remained flat in 2005, and fell by 0.8 percent in 2004, while it rose by 7.6 percent ten years ago, according to a presentation by PricewaterhouseCoopers during the conference.

Investor sentiment in Germany slumped unexpectedly to its lowest level in nearly eight years in September, meanwhile, on worries that slower exports, interest rate rises and a tax hike could deal the economy a triple blow.

"Germany has been and will be in the doldrums for some time," said Wolf Waschkuhn, managing director at Kroll Talbot Hughes Deutschland Gmbh.



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